The Platinum and Gold loyalty tiers, just 16% of loyalty program shoppers, accounted for over 51% of loyalty program revenue – a make-or-break for any store. Another eye-opener, 16% of loyalty program members have stopped making additional purchases and have practically left. Retaining customers at the top tiers and incentivizing those on the lower tiers to up their spend both have a significant impact on revenue. So how is loyalty tier analysis for high-frequency retailers accomplished?
In some industries, tiers are very straightforward. In airline loyalty programs, for example, your tier is defined by how many miles you accumulate. The flying public is loyalty-program savvy, winging through hoops to ascend the loyalty ladder. Top-tier loyalty customers are assigned a different card and more perks than occasional loyalty members.
High-frequency retail is a markedly different environment. Applying the miles-equal-value hypothesis does not encompass the complexity of recurring purchase patterns.
For example, one customer makes very large purchases but once a quarter; another comes in every other day for small top-ups—which is more loyal? What’s more, unlike airline miles programs, most retail programs don’t divulge a customer’s tier and customer perks are not tier-specific.
Consequently, retailers must apply multiple variables when defining their loyalty tier model. Only a flexible view of customer loyalty that incorporates highly varied purchasing habits can maximize revenue and decrease churn among a diverse group of customers.
Ignoring this logic can lead to misguided retail policies. For example, one retailer incentivizing loyalty customers with a fixed discount on all purchases over $200 caused higher-frequency customers with smaller basket sizes to postpone purchases, reducing their overall value, as they tended to make urgent purchases elsewhere.
The RFM Model
Enter the RFM model for high-frequency retailer loyalty, which distributes customer value into tiers based on three main factors:
● Recency: The length of time since the last purchase.
● Frequency: The number of times they visit the store.
● Monetary value: The amount of money spent.
Here is an example of how loyal customers are divided into RFM tiers.
The RFM model’s more flexible view of loyalty, depicted above, demonstrates how customer value is measured over three different axes. Platinum customers can make $20 purchases on weekly basis, but once-a-month customers have to purchase over $40 dollars to be considered Silver. Use benchmarks with caution, however, as tiers are retailer-specific and must account for difference in industry vertical, geography, and other factors.
Tiers and categories
Using big data we gain an even deeper understanding of the RFM model. Research done at a grocery retailer reveals that top-tier customers were typically loyal to at least 29 departments and 41 subcategories, suggesting that they were this retailer’s prized one-stop shoppers. Bronze customers, however, averaged buys in only 3 departments and 4 subcategories, suggesting cherry-picking behavior.
Enhance loyalty by persuading clients to try new departments and categories, increasing both retention and value. Providing offers for departments in which they don’t usually buy moves customers up the ladder. This more personalized loyalty approach requires offers specifically designed to attract shoppers from a competitor’s aisles into yours, not only increasing their spend but also reducing the likelihood of churn.
Consider three main factors when distributing loyalty customers into tiers – recency, frequency and monetary value. Roughly speaking, 20% of customers generate around 80% of revenue, although actual results will vary.
The goal of loyalty programs is to encourage customers to ascend the loyalty ladder by luring them to shop in more departments and categories and getting them into the store more often. The way to success is personalization – giving offers based on an understanding of their purchase in your store and their purchase with the competition. Such offers not only provide an incentive to explore more of what your store has to offer, but they are also proven to reduce churn and help customers climb the loyalty ladder.
This post is a part of a series of blog posts covering loyalty, retention, and personalization.
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